Saturday, June 29, 2013

Apple Could Benefit from Window Undressing in July

By The Greek:
It sounds strange to say but Apple (Nasdaq: AAPL) turned into a portfolio pariah over the last year, with the stock down 31% since the end of last June. It sank even further during Q2, and now everyone knows about it from Wall Street to Main Street. So, as strange as it may sound, it is possible Apple took some damage from window dressing before the close of Q2. After all, the stock was down 12% in June alone. Therefore, it is also possible that portfolio managers will be buying it back in July, and so the stock might just benefit from “reverse window dressing” or undressing in July.

Apple

Window dressing is when portfolio managers pick up stocks that have performed especially well just before the close of a reporting period. Likewise, they may dump losing stocks, especially high profile losers, before the close of a reporting period. In so doing, they can show a high profile winner and do not have to show losing securities on their financial statement of holdings. So when Joe Investor receives his statement showing him what his hired portfolio manager found savory, he does not see that stink of a name everyone hates on the list but does see that big name winner everyone loves, like say for instance Tesla Motors (Nasdaq: TSLA). That makes for a reduced possibility of Joe liquidating his stake in the mutual fund or other portfolio. In turn, that means the portfolio manager will not lose his management fee from those assets under management, and so he has some incentive.

It’s counterintuitive to value investing logic, yes, since many see value in beaten down shares, especially in a name like Apple (Nasdaq: AAPL), which many believe has extreme value appeal here. Apple now trades at a P/E of 9.1X the analysts’ consensus estimate for fiscal year 2014 (September) EPS of $43.62. Matched against 21% long-term growth expectations gives AAPL a deeply discounted PEG ratio of 0.4X. Still, it happens and it affects capital flows and stock prices, and so it may have contributed in making a cheap stock even cheaper in June.

For Apple (AAPL), I think many of you will agree that it has been a lack of news about any new disruptive product that has more meaningfully hurt the shares over the last year. I authored an article about that theory entitled, For Apple, No News is Bad News way back when. If investors were enamored with the company, it would not be in the position to be considered for removal for window dressing purposes in the first place. However, it was in that position in June, and may have been removed by a critical number of professionals as a result.

Now, heading into Q3 and July all those investors who believe in the name for the second half for whatever reason, have impetus to buy. Even if they were not window dressers, they know others were and will drive capital flow no matter what they do or do not do. So the prospect of other investors pushing the stock up from this most recent bottom here could be an important fear factor in getting capital back into the stock now. It’s a trader’s hypothesis; there’s no doubt about that, but it is still a viable a near-term reason to consider buying Apple here.

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